Labor productivity in Canada

Dec. 26, 2010 5:23 AM ET

Two years ago we published two papers [1,2] which introduced a new macroeconomic model explaining the evolution of labor productivity in developed countries. The model is absolutely parsimonious and uses only one measured macroeconomic variable as the driving force of the productivity growth – real GDP per capita. Figure 3.22 is borrowed from our monograph “mechanomics. Economics as Classical Mechanics” and illustrates the predictive power of the model as applied to Canada. (Due to extremely high volatility of productivity measurements, the measured data set is represented by its 5-year moving average, MA(5)). All coefficients in the model for Canada were obtained empirically, as explained in the monograph.

Considering the simplicity of the model and the accuracy of data on real GDP and productivity, the prediction of the time history in Canada is excellent. (We would be grateful if the reader could provide us with a reference to a model which gives better predictions.) It is also important that the prediction covers the whole period since 1960 with one deterministic link without any structural breaks. The latter is the inevitable and crucial element of any explanation of productivity in developed countries. Moreover, all mainstream macroeconomic models (e.g. DGSE) are using the notion of shocks to productivity as a central phenomenon explaining all bigger deviations in the rate of real economic growth. This implies that productivity must define real GDP. This assumption contradicts observations, as our model demonstrates – the change in labor force productivity lags by two (!) years behind the defining change in real GDP. Therefore, productivity is not a proactive macroeconomic variable.

Since the data set was limited by 2007, one can test the predictive power of the model using new data and extend the forecasting horizon. As before, we use the data set published by the Conference Board [3]. Figure 1 shows that our prediction for 2008 and 2009 was accurate. In the near future, one can expect a significant growth in labor productivity in Canada.

For further validation of the model, we are going to revisit our predictions for other developed countries.

Figure 1. Same as in Figure 3.22 extended by measurements in 2008 and 2009.